Upload
deepika-rana
View
218
Download
0
Embed Size (px)
Citation preview
8/2/2019 Fin All
1/17
PROJECT REPORT
ON
ACCOUNTING FRAUDS IN INDIA
Submitted in partial fulfillment for the award of the degree of
MASTER OF BUSINESS ADMINISTRATION
UNDER THE GUIDANCE OF:
Mrs. Swati Narula
Faculty, GIBS
SUBMITTED BY:
DEEPIKA RANA
GEETIKA RATHORE
NEHA GARG
PRASHANT BANDHU
PRATEIK
GITARATTAN INTERNATIONAL BUSINESS
SCHOOL(Affiliated to Guru Gobind Singh Indraprastha University.)
ROHINI, NEW DELHI 110085
(2011-2013)
TABLE OF CONTENTS
8/2/2019 Fin All
2/17
Chapter: 1- Objective of study
Chapter: 2- Introduction to Accounting
2.1 What is Accounting 2.2 Features of Accounting 2.3 Importance of Accounting
Chapter: 3- Accounting Frauds
3.1 Accounting Frauds-Concept 3.2 Common Accounting Frauds
Chapter: 4- Accounting Frauds in India
4.1 Some Major Cases 4.2 Case Study
Chapter: 5- Conclusion
Bibliography
8/2/2019 Fin All
3/17
CHAPTER-1
OBJECTIVES OF STUDY
8/2/2019 Fin All
4/17
Our study has the following objectives:
To know what is accounting. To know the importance of accounting.
To know the meaning of accounting frauds. To know some common type of accounting frauds. To study some frauds that happened in India.
8/2/2019 Fin All
5/17
CHAPTER2
ACCOUNTING
8/2/2019 Fin All
6/17
Accounting communicates the results of the business to the users of accounting information
to enable them to make reasoned decisions. Accounting is often called the language of
business. To communicate information ,accounting follows a systematic process of recording
,classifying and summarizing of numerous business transactions resulting in creation of
financial statements. The two most important financial statements are Profit & Loss accountand Balance Sheet. Profit & Loss account depicts the net results of the business operations
i.e. net profit during an accounting period and Balance Sheet depicts the nature and amount
of assets, liabilities and capital of a business and indicates the financial position of the
business at a particular date.
Accounting is the art of recording, classifying and summarizing in a significant manner and
in terms of money, transactions and events which are, part at least of a financial character and
interpreting the results thereof.-AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS (A.I.C.P.A.)
FEATURES OF ACCOUNTING: IDENTIFYING TRANSACTIONS OF FINANCIAL CHARACTER
Only those transactions and events are recorded in accountings which are of a
financial character and which can be expressed in terms of money.
RECORDINGAccounting is the art of recording business transactions according to some specified
rules. The various books of recording are journal, cash book, purchases book, sales
book, purchases return book, sales return book, etc.
CLASSIFYINGClassification is the process of grouping the transactions of one nature at one place, in
a separate account. The book in which various accounts are opened is called ledger.
SUMMARIZINGSummarizing is the art of presenting the classified data in a manner which is
understandable and useful to management and other users of such data.this involves
the balancing of ledger accounts and preparation of trial balance with the help of such
balances.
INTERPRETING THE RESULTSIn accounting, the results are prepared in such a manner that the parties interested inthe business such as proprietors, managers, banks, creditors, etc. can have full
information about the profitability and the financial position of the business.
COMMUNICATINGIt refers to transmission of summarized and interpreted information to a variety of
users who have an interest in the enterprise to enable them to make reasoned
decisions.
8/2/2019 Fin All
7/17
OBJECTIVES OR FUNCTIONS OF ACCOUNTINGThe following are the main objectives or functions of accounting:
THE MAINTENANCE OF SYSTEMATIC RECORD OF BUSINESSTRANSACTIONS.
Complete record of business transactions helps to avoid the possibility of omission and fraud.
For this purpose, all the business transactions are first of all recorded in journal or subsidiary
books and then posted into ledger.
CALCULATION OF PROFIT AND LOSSTo ascertain the net profit earned or loss suffered on account of business transactions during a
particular period trading and profit and loss account of the business is prepared at the end of
each accounting period. All the items relating to purchases, sales, expenses and revenues of
the business are recorded in trading and profit and loss account. If the amount of revenue
exceeds the expenditure incurred in earning that revenue, there is said to be a profit. In case
expenditure exceeds the revenue, there is said to be loss.in addition, a businessman is able to
get the following information by preparing a trading and profit and loss account-
-purchases
-sales
-unsold goods and their value
-expenditure and revenue
By attaining these information a businessman can keep effective control on expenditure.
DEPICTION OF FINANCIAL POSITION OF BUSINESSAfter preparing profit and loss account a statement called balance sheet is prepared which
shows the assets and their values on one hand and the liabilities and capital on the other hand.
A balance sheet is usually I picture of the financial position of the business. At one glance,
one would know the following by looking at the balance sheet:
1. how much the business has to recover from debtors.
2 how much the business has to pay to creditors.
3 .how much the business has in form of cash in hand, cash at bank, closing stock and
fixed assets.
TO PORTRAY THE LIQUIDITY POSITIONTo provide information about how an enterprise obtains and spends cash. For this purpose it
prepares a cash flow statement depicting inflows and outflows of cash from operating,
investing and financing activities.
TO FILE TAX RETURNSTo provide bases for filling tax returns relating to income tax, sales tax, VAT, service tax,
excise duty, etc.
COMMUNICATING ACCOUNTING INFORMATION TO VARIOUS USERS
8/2/2019 Fin All
8/17
To communicate the accounting information to various interested parties like owners,
investors, banks, etc. the information helps them in taking sound and judicious decisions
about the business entity.
CHAPTER 3ACCOUNTING FRAUDS
The intentional misrepresentation or alteration of accounting records regarding sales,
revenues, expenses and other factors for a profit motive such as inflating company stock
values, obtaining more favorable financing or avoiding debt obligations. Employees who
commit accounting fraud at the request of their employers are subject to personal criminal
prosecution.
8/2/2019 Fin All
9/17
COMMON ACCOUNTING FRAUDS
ACCOUNTS RECEIVABLE
The accounts receivable number that shows up in the asset section of a balancer sheet is
almost always an estimate of what accounts are actually collectable. the number is an
estimate Because even if management can identify the precise amount its customers or clients
owe the business, usually it is less than certain that this is the actual number that will
ultimately be collected.
Sometimes the valuation of accounts receivable goes beyond simply making a good faith
estimate of collectability. In some situations management may be tempted to commit outright
fraud. Because no cash is collected when sales are made on account, a corrupt management
can record fraudulent additional sales by simply creating fictitious customers and recording
fictitious sales.
Another time honored-means of inflating accounts receivable and sales revenue involves
keeping the books open at the end of the accounting period. In this case the customers and
sales are real, but January sales are recorded as December sales so the end of year financial
statements include inflated assets and revenue.
Part of the audit function is to test the existence and collectability of accounts receivable and
this can serve as a brake on such fraudulent practices. In the audit of large companies with
millions of dollars of receivables and hundreds of thousands of individual accounts, the audit
process relies on statistical sampling, which usually provides a reasonable, but not exact,
estimate of collectable accounts.
ACCOUNTS PAYABLE
Management may have a motive to understate payables, as this understates expenses and
overstates net income. Usually the amount of payable understatement is not too great and
such understatement can easily be detected.
DEFERRED REVENUE AND PREPAID EXPENSES
8/2/2019 Fin All
10/17
A manager can overstate income and understate liabilities by treating deferred revenue as
earned revenue. Essentially, this shady practice seeks to recognize revenue before it is
actually earned. Such mischief often is not easy to detect, because it is not always clear when
the earnings process is fully complete.
A manager also can understate current year expenses by claiming they are prepaid expenses.
This amounts to a fraudulent claim that payments for a certain service benefit future
accounting periods when, in fact they do not. Recently a large telecommunications company
incurred significant cash expenses on maintenance of its utility lines. It fraudulently classified
most of the outlays as prepaid expense, rather than current period expense. Since prepaid
expenses are recorded as an asset rather than an expense, expenses were understated; hence,
profits were overstated.
FIXED ASSETS
so many different methods of depreciation and the useful life of assets is subject to varying
estimates, there is plenty of opportunity for management mischief. Management can make a
firm appear more profitable than it really is by understating depreciation expense.
Depreciation expense can be understated by overstating the useful life of assets. Management
can also overstate its assets by keeping obsolete and no longer used assets on its balance
sheet. Maintaining obsolete assets on the balance sheet also overstates net income because
losses on the disposal of these assets are not recorded.
INVENTORY
Inventory offers a big opportunity for management to air brush their financial statements. If
they want gross profits and, hence, operating profits to appear higher, the value of ending
inventory simply needs to be overstated. There are many ways this can be done.
The ending inventory value can be fudged upward by overstating the amount of inventory on
hand. Unit costs assigned to ending inventory can be inflated as well. Or obsolete or damaged
inventory can be included in the ending inventory count.
Sometimes for income tax purposes, management may want to show lower gross and
operating profits. Ending inventory mis-measurement can be used for this purpose as well. In
this situation, management seeks to undercount and undervalue ending inventory.
8/2/2019 Fin All
11/17
TYPE OF ACCOUNTING FRAUDS1. MANIPULATION REVENUE AND ACCOUNT RECEIVABLES
Areas and common methods used to fraud:
AREA: SALES MANIPULATION
Recording fictitious revenue ( related parties, sales with conditions, consignment orsham sales),
Recognize revenues too early by having improper cut-off, Overstating real revenue by altering contracts and inflating the amount, etc) Omission to record returned goods, Record returned goods after financial year end closes, Do not recognize discounts given hence increasing revenue,
AREAS: ACCOUNTS RECEIVABLES
Understate provision for doubtful debts thus overstating receivables, Not writing off uncollectible receivables or wrote off after financial year end closes, Record bank transfers or manipulate cash received from related parties as cash
received from customers
Example of such Accounting Fraud: GLOBAL CROSSING & QUEST
2. MANIPULATION OF STOCK AND COST OF GOODS
Areas and common methods of fraud:
AREA: MANIPULATION OF INVENTORY AND OR COST OF GOODS SOLD
Over-counting physical inventory, Over-valuation of inventory, Not writing off obsolete inventory, Not providing for slow-moving inventory, Incorrect costing of inventory,
Record fictitious inventory into the books of account,
8/2/2019 Fin All
12/17
Under-record purchases, Record purchases after financial year end closes, Omission of recording purchases, Overstating returns to suppliers, Record returns in an earlier period by ignoring the proper cut-off, Overstate discounts, Record very low amount of costs of goods sold, Omit to records cost of goods sold or reduce inventory
Example of such Accounting Fraud: PharMor
3. UNDERSTANDING LIABILITIES AND EXPENSES
Areas and common methods of fraud:
AREA: UNDERSTATING LIABILITIES/EXPENSE FRAUD
Not recording accounts payable Not recording accrued liabilities Recording unearned revenues as earned Not recording warranty or service liabilities Not recording loans or keep liabilities off the books Not recording contingent liabilities
Example of such Accounting Fraud: Enron
4. OVERSTATING ASSETS
Areas and common methods of fraud:
AREA: OVERSTATING ASSETS
Overstatement of current assets (e.g. marketable securities) Overstating pension assets
8/2/2019 Fin All
13/17
Capitalizing as assets amounts that should be expensed Failing to record depreciation/amortization expense Overstating assets through mergers and acquisitions Overstating inventory and receivables
Example of such Accounting Fraud: WorldCom
5. DISCLOSURE FRAUD-WINDOW DRESSING PURPOSE AND SOME OF THE WAY
S TO DO IT
Areas and common methods of fraud:
AREA: OVERALL MISREPRESENTATION
There are three (3) categories of disclosure frauds which comprises the following:
Overall misrepresentations about the nature of the company or its products, usuallymade through news reports, interviews, annual reports, and elsewhere
Misrepresentations in the management discussions and other non-financial statement Sections of annual reports, 10-Ks, 10-Qs, and other reports Misrepresentations in the footnotes to the financial statements
Example of such Accounting Fraud: Bre-X Minerals
6. What Is Teaming And Lading & How To Prevent it
We often hear of one common accounting fraud which is called Teaming and lading.
So what is Teaming and Lading?
Teaming and lading is a term normally used for borrowing from cash to repay by cheque at
a later date.
When a business received incomes receipts, it can come from both cash and cheques and if
the internal check is lacking then the fraud perpetuator can divert the cash cheque for his/her
personal use.
So how do we prevent Teaming and Lading fraud?
8/2/2019 Fin All
14/17
To prevent teaming and lading, the following internal controls/checks should be instituted:
The cash and cheque received should be split into two different types re: cash andcheque banking in slip. The cash/cheque split on paying in slips will allow the school
to ensure that staff have not been encashing personal cheques against income
collected;
There should be reconciliation which should involve the matching of the incomereceipts/other documentation to accounting records on the one hand and bank
statements and paying-in slips on the other;
If any income is unaccounted for, the separate listing of all individual cheques on thepaying-in slip allows the identification of the missing income element;
There should be proper segregation of duties. The person carrying out thisreconciliation should not be the person who banked the income;
These reconciliations should be reviewed by someone independent of income process
CHAPTER 4
8/2/2019 Fin All
15/17
BIBLIOGRAPHY
8/2/2019 Fin All
16/17
BOOK:
FINANCIAL ACCOUNTING
Websites:
8/2/2019 Fin All
17/17